Allocation Across Taxable and Tax Deferred Funds

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Don46
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Joined: Sun Feb 24, 2013 5:53 pm

Allocation Across Taxable and Tax Deferred Funds

Post by Don46 »

I have my investments more or less evenly divided in taxable and tax deferred accounts, as it happens. I am transitioning from a situation in which an investment manager had my fixed income investments in the tax deferred account and the equity investments in the taxable. I want to arrive at something like a 50/50 allocation stock and fixed income. Should I use the taxable for one and the tax deferred for another kind of investment or have one mirror the other? I welcome your recommendations.
livesoft
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Re: Allocation Across Taxable and Tax Deferred Funds

Post by livesoft »

I don't know what you should do, but I can say what I do with about a 50:50 split of taxable:tax-advantaged. I have no bonds nor fixed income in taxable. The bulk of taxable is in tax-efficient international index funds with some US stock index funds as well. Tax-advantaged has all the fixed income plus plenty of US and foreign equities, so that all rebalancing can be done in tax-advantaged accounts.
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Benn1950
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Re: Allocation Across Taxable and Tax Deferred Funds

Post by Benn1950 »

Your investment manager created a very tax-efficient portfolio for you and you should continue this allocation. If you understand that returns on your fixed income investments are fully taxable you can understand why your investment manager put these in your tax deferred account. The returns on your equities (dividends and capital gains) are tax advantaged in that they are taxed (in most cases) at less than your marginal rate, hence their placement in your taxable account. The only fixed income you should keep in your taxable account would be tax-free muni's.

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grabiner
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Re: Allocation Across Taxable and Tax Deferred Funds

Post by grabiner »

Don46 wrote:I have my investments more or less evenly divided in taxable and tax deferred accounts, as it happens. I am transitioning from a situation in which an investment manager had my fixed income investments in the tax deferred account and the equity investments in the taxable. I want to arrive at something like a 50/50 allocation stock and fixed income. Should I use the taxable for one and the tax deferred for another kind of investment or have one mirror the other? I welcome your recommendations.
Since you already have your equities in a taxable account, you should leave them there. While some investors prefer holding the same allocation in both accounts for simplicity (at a possible tax cost, or cost to avoid taxes if you hold municipal bonds in taxable), you would have a significant tax cost if you change to this strategy, as you would have to sell your equities for a taxable gain.
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Don46
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Joined: Sun Feb 24, 2013 5:53 pm

Re: Allocation Across Taxable and Tax Deferred Funds

Post by Don46 »

This makes sense to me. At present my tax deferred account is full of losses from some very bad bets on bonds my investment manager put me into. I wish I could use them in my taxable account! There I have some big gains, which I will want to move out of slowly with an eye on my taxable income over the next few years
Now I want to move into bond funds in the tax deferred account
Thanks all
Dandy
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Re: Allocation Across Taxable and Tax Deferred Funds

Post by Dandy »

Most recommend filling the tax advantaged space with bonds, REITS and other income oriented vehicles since withdrawals are taxed as ordinary income and equity distributions have favorable tax treatment when held in taxable accounts. I like having a bit of equities in my IRA and a bit on fixed income in my taxable accounts. It adds some growth to my IRA and makes rebalancing very flexible so that I can avoid taxable events. In this recent equity market I have been rebalancing by selling some IRA equities to rebalance.

I know that at least one respected money manager that contributes to this forum has clients have equities and fixed income in both types of accounts.

Naturally, most fixed income held outside of my IRA is in muni funds but I do hold some CDs. With interest rates so low that has not created much of a tax issue.
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